E-L Financial has released (via SEDAR, dated May 8 ) its 1Q09 Financials, so let’s have a look.
For the three months ended March 31, 2009, E-L Financial earned net operating income of $34.5 million or $9.64 per share compared with a net operating loss of $5.7 million or $2.46 per share for the first quarter of 2008.
Net loss for the quarter was $133.7 million or $41.00 per share compared with a net loss of $21.4 million or $7.20 per share for the comparable period last year.
The results were impacted by two significant events that occurred in the first quarter. The general insurance operation incurred a net loss of $148.2 million for the first quarter ($2.9 million net loss in the first quarter of 2008). An impairment provision was recorded for its common equity pooled fund units in the amount of $226.1 million, before income tax, most of which was recorded as an unrealized loss in other comprehensive income in 2008. These pooled fund units were written down since the fair value was less than cost and, early in the second quarter, they were redeemed in kind, as a result of the general insurance operation’s decision to change its third part equity investment manager.
Secondly, on March 4, 2009, proposed amendments to the Income Tax Act passed third reading causing them to become substantively enacted for accounting purposes. Under these amendments, certain capital losses have been re-characterized as income losses for tax purposes. These amendments also result in most insurance investments and policy liabilities being taxed on a fair value basis, consistent with changes in accounting rules for financial instruments adopted in 2007. The impact of these amendments using fair values as of March 4, 2009 was a one-time increase to net income of $102.4 million. Most of this increase is due to a tax recovery relating to the recognition of unused tax losses on equity investments previously classifi ed as capital losses which were not considered to be recoverable and therefore not recognized in 2008.
Exposures:
| ELF Exposures | |
| Tangible Holdco Equity* CAD Millions |
2,276 |
| Other Tier 1 | 8.8% |
| Stock Leverage | 78%** |
| Bond Leverage | 183% *** |
| Seg Fund Leverage | 147% |
| Effect of +1% Interest Rates | 0.9% |
| Effect of -10% Equity Market *** | 1.6% |
| Tangible Holdco Equity (THE) is Common Shares (72) plus Retained Earnings (2,121) plus Non-controlling interest in subsidiaries (130) plus Participating Policyholders’ interest (60) less Other Comprehensive Income (107) = 2,276. | |
| Other Tier 1 = Preferred Shares (200) = 200 / THE | |
| Stock Leverage is Stocks in Portfolio Investments (772) + General Insurance (594) + Life Insurance (403) divided by Tangible Holdco Equity. Note that there is an unrecognzed loss of 200 in the stocks in “Portfolio Investments” | |
| Bond Leverage is bonds in Portfolio Investments (41) + General Insurance (1,297) + Mortgages/Commercial Loans in General Insurance (49) + Life Insurance (2,257) + M/CL in Life Insurance 237) + Policy Loans (38) + Policy Contract Loans (143) + Reinsurance recoverable (112) = 4,174 divided by Tangible Holdco Equity. | |
| Equity effect = Net Income (5) +OCI (16) + SegFunds (16) / THE | |
| Interest rate effect = Net income (24) LESS OCI (4) = 20 / THE (Note that this is reversed; it is a decrease in rates that frightens them, implying their longs have lower duration than their shorts) | |
| Sources: MD&A, 4Q08; MD&A, 1Q09; Financials, 1Q09 | |
Despite including this post in the “Regulatory Capital” category of PrefBlog, I will not discuss MCCSR. This figure is useless for analytical purposes, since:
- Corresponding US calculations are not disclosed
- As preferred share investors we are interested in the publicly issued preferred shares, at the holdco level
As noted by DBRS:
The incurrence of debt at the holding company to provide equity capital to operating subsidiaries constitutes double leverage, the use of which should be conservative. The analysis of double leverage requires a review of the unconsolidated financial statements of the holding company, which are generally not in the public domain.
[…] The headline net loss of $130.8-million YTD is largely due to the first-quarter write-down of available-for-sale investments, which was reported on PrefBlog. […]